Tuesday, 26 April 2011

The Witch-Hunt Begins as Gas Prices Continue to Climb

Summer is approaching, and that typically means rising gas prices. And when gas prices rise, our political leaders generally start looking around for someone to blame. Over the past few years it has become a regular ritual that as gas prices rise, the CEOs of our biggest oil companies will be marched to Washington D.C. for a public shaming that involves Congress grilling them on why they are doing such horrible things to the American public.

Inevitably, we will spend tax dollars investigating the matter. And as was the case after Hurricane Katrina, one FTC investigation after another has found no conspiracy to fix prices; that supply and demand are in fact the primary reasons that gas prices rise and fall. But while the investigations are always launched with press conferences, the exonerations don’t involve the same sort of fanfare, and the public is left with the impression that someone is taking advantage of them. Of course when record oil company profits come on the heels of record gas prices, it is easy to understand why people feel that way.

I was asked during a recent radio interview who is responsible for high gas prices. While that is a complex answer with many factors contributing, mostly consumers of oil-based products are responsible. If you drive a car that is made from numerous plastics and consumes diesel or gasoline, then you are partially responsible for high gas prices. After all, there are a whole lot of people just like you, and we enjoy the conveniences that oil has brought us. But that convenience has made us very dependent, and other countries want those same conveniences. Growing demand of a depleting resource is a prescription for higher prices.

The 2011 Dog and Pony Show

But, unsatisfied that we could possibly be the ones to blame, our politicians take the easy way out and launch investigations. And now President Obama, responding to pressure that he isn’t doing enough to combat high gas prices, has launched a new one:

LOS ANGELES (KABC) — President Barack Obama has ordered the Justice Department to investigate potential price gouging at the pump.

Attorney General Eric Holder will appoint a task force to examine both gasoline sales and potential manipulation in oil markets.

“Based upon our work and research to date, it is evident that there are regional differences in gasoline prices, as well as differences in the statutory and other legal tools at the government’s disposal,” Holder said in a memo accompanying a statement announcing the task force.

I can save them some time and explain why there are regional differences in gasoline prices. I have seen it many times firsthand. Neighboring regions often have different requirements for their gasoline. This can mean that a shortage in one area can’t be easily alleviated by shipping in gasoline from another area. Further, sometimes there are no pipelines to easily get fuel from one area into another. I experienced this when I worked in a refinery in Montana. Gasoline prices at one time were very high in Utah, but we had no easy way to get fuel into that market. We also sometimes saw very low oil prices in North Dakota, but once more no easy way to get that oil into our refinery due to lack of pipelines.

President Obama went on to admit that it’s all a dog and pony show:

Neither the president nor Holder have offered any evidence of actual fraud, and both admit there are legal, logical reasons for the rising price of gas. But Obama says he wants to make sure that no one uses the current market as an opportunity for criminal activity.

So, no evidence of fraud, and logical reasons for the price increase. Then let’s waste taxpayer money by launching an investigation. Maybe we will find a small group of speculators this time pulling the strings. While we are at it, I can think of a few more things we should investigate.

Additional Investigations to Consider

Standard & Poor’s lowered the outlook on its triple-A rating of U.S. debt from stable to negative. The U.S. dollar has been incredibly weak against most major foreign currencies. This has been cited as one of the biggest factors behind increased oil prices. Shouldn’t we launch an investigation to determine who is responsible for the debasing of our currency?

Corn prices have doubled over the past year. Corn farmers in Iowa are celebrating Christmas in April. Doesn’t this mean they are taking advantage of us? Given the importance of corn in the food supply, shouldn’t we launch an investigation into this gouging? Or shall we nominate Donald Trump to tell corn farmers to lower prices?

Easter candy was marked half off the day after Easter. Doesn’t that mean I was being gouged and taken advantage of prior to Easter? This warrants an investigation into the pricing policies of Cadbury’s, as well as the retail outlets who sell it. I demand cheap chocolate, and I see no reason why I should have to pay more for it before Easter.

Conclusions

It seems that this political merry-go-round of investigations is part of the very fabric of our lives. Gas prices go up, and politicians start looking for scapegoats. It can’t possibly be the policies they have passed, nor can it be the world’s insatiable demand for oil. Someone, somewhere must be pulling the strings and taking advantage of people.

There are many factors behind the increase in gas prices, and one of them is in fact speculation. But we place far too much emphasis on this speculation bogeyman. Speculation goes on in all commodity and stock markets. Corn prices are up partially because of speculation. The price of metal is driven up by speculators. All of these things impact consumers. But speculation works in both directions, which is why oil fell so sharply from $147 in mid-2008 to the $30’s by the end of 2008 (and why stock price bubbles lead to stock price crashes).

The single-biggest factor behind the price rise, though, is simply growing demand for oil. Donald Trump can pontificate about there being so much oil that they don’t know where to dump it, but he simply doesn’t know what he is talking about. There is very little spare capacity in the world, and demand is growing. A more productive investigation would be to figure out how to increase supplies and curb demand. But that of course would require a bit more effort on the part of our political leaders.